AM Best Downgrades Credit Ratings of California Earthquake Authority

AM Best has downgraded the Financial Strength Rating (FSR) to B++ (Good) from A- (Excellent) and the Long-Term Issuer Credit Rating (Long-Term ICR) to “bbb+” (Good) from “a-” (Excellent) of California Earthquake Authority (CEA) (Sacramento, CA). The outlook of the Long-Term ICR has been revised to negative from stable, while the outlook of the FSR is stable.

The Credit Ratings (ratings) reflect CEA’s balance sheet strength, which AM Best assesses as strong, as well as its strong operating performance, limited business profile and appropriate enterprise risk management.

The rating downgrades are based on the deterioration of CEA’s balance sheet strength over the past year due to a decline in risk-adjusted capitalization as measured by Best’s Capital Adequacy Ratio (BCAR). The decline in risk-adjusted capitalization was driven by a reduction in CEA’s claims-paying capacity to a modeled 1-in-360-year return period as of Jan. 1, 2023, from a modeled 1-in-400-year return period at the time of AM Best’s previous annual rating review. The reduction in claims-paying capacity was attributable to the impact of market conditions, which included continued increases in exposure and most recently, reduced reinsurance availability.

The Long-Term ICR outlook of negative reflects the CEA Governing Board’s decision to reduce the minimum level of claims-paying capacity to a modeled 1-in-350-year return period and the expectation that challenging reinsurance market conditions will continue to pressure CEA’s claims-paying capacity. Furthermore, the CEA Governing Board’s 2023 risk transfer strategy includes the flexibility to drop below the modeled 1-in-350-year return period if driven by market conditions, with prompt notification of the Governing Board.

While the CEA has various initiatives underway to manage exposure, including coverage and deductible modifications, the ultimate effectiveness of these efforts and their impact on its risk-adjusted capitalization and balance sheet strength remain uncertain.

This press release relates to Credit Ratings that have been published on AM Best’s website. For all rating information relating to the release and pertinent disclosures, including details of the office responsible for issuing each of the individual ratings referenced in this release, please see AM Best’s Recent Rating Activity web page. For additional information regarding the use and limitations of Credit Rating opinions, please view Guide to Best's Credit Ratings. For information on the proper use of Best’s Credit Ratings, Best’s Performance Assessments, Best’s Preliminary Credit Assessments and AM Best press releases, please view Guide to Proper Use of Best’s Ratings & Assessments.

AM Best is a global credit rating agency, news publisher and data analytics provider specializing in the insurance industry. Headquartered in the United States, the company does business in over 100 countries with regional offices in London, Amsterdam, Dubai, Hong Kong, Singapore and Mexico City. For more information, visit www.ambest.com.

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